Vietnam’s transition from a centrally planned to market oriented economy faces
a new host of challenges posed by galloping inflation. Depending on how deftly
economic and financial policymakers respond, it could make or break the
country’s until now successful economic reform program.
The country’s main consumer inflation benchmark was up 15.7% year on year in
February, the biggest jump in over a dozen years and currently the highest rate
in industrializing East Asia. Inflation has jumped by double digits for each of
the past five months,
threatening to undermine the macroeconomic and social stability that has
underpinned fast GDP growth, which over the past five years has averaged over
8%.
In particular, discontent over increased inflation is on the rise in the
industrial sector, the backbone of Vietnam’s export-driven economy. That’s been
witnessed in the growing number of industrial disputes and strikes over wages
and work conditions, which to date have disproportionately hit foreign-invested
firms.
In mid-February, more than 5,000 workers went on strike demanding pay rises,
more allowances, and a reduction in working hours at the Japanese-owned Yazaky
Eds Viet Nam Ltd, which produces automobile parts for export from the northern
industrial city of Haiphong City. Local newspapers reported that the workers
said that their average monthly wages of between 1.1 milion dong - 1.2 million
dong (US$68.75 to US$75), which are above minimum wage rates, were not enough
to cover even their daily living expenses.
In the first two weeks of this year, 50 strikes took place across the fast
industrializing country, according to the Ministry of Labor. In early March,
some 10,000 workers walked off the job at the South Korea-owned Tae Kwang Vina
factory, which makes shoes for US apparel company Nike on the outskirts of Ho
Chi Minh City. Those factory workers similarly demanded higher pay to keep pace
with rising prices.
From 1995 to the end of January 2006, more than 1,000 strikes took place in
Vietnam, with some 387 of those worker walk-outs occurring last year and
coinciding with rising local costs, according to government statistics. Of
those, 300 strikes targeted foreign-invested firms. To the chagrin of foreign
investors, the government last year increased the minimum wage for industrial
workers by around 25%. But as consumer prices surge, labor unrest is
nonetheless on the rise.
Vietnam is not alone in Asia in facing inflationary pressures, but its headline
rates are nearly double those of its main regional competitors, with China’s
rate hovering around 7.1% and Indonesia 7.4%. Hanoi’s emerging inflation
problem can only partially be blamed on global market forces, including fast
rising food and petroleum prices.
The state-run General Statistical Office said upon its announcement of
February’s 15.7% year-on-year spike in consumer prices that the increase was
driven mainly by a 25.2% increase in the cost of foodstuffs and a 16.4% rise in
housing and building materials, reflecting the country’s breakneck construction
boom.
The overheating economy is also unsettling the balance of payments, with a huge
trade deficit opening up as imports rise. For the first two months of 2008, the
deficit was US$4.2 billion, compared to $12.4 billion for the whole of 2007.
That statistic represented a sharp rise on the $4.8 billion for 2006.
But those pressures are being compounded in Vietnam’s particular case by a host
of domestic factors, including the rapid inflow of foreign capital, consequent
fast growth in the local money supply and, apparently, the government’s
relative inexperience in managing such technocratic challenges.
The government has in recent years sought to modernize the State Bank of
Vietnam (SBV) into a capable steward of monetary and exchange rate policies, as
part of its World Bank endorsed financial sector reform program. It was
precisely those types of market-friendly reforms that had in recent years made
Vietnam a regional darling for international investors and manufacturing
businesses.
Now with macroeconomic stability at risk, that love affair has hit choppy
waters. Those concerns were underlined when the government abruptly postponed a
major EuroMoney investment conference scheduled for earlier this month which
last year drew over 1,500 delegates from more than 30 different countries,
resulting in scores of new multi-million dollar investments and joint venture
deals.
Then there was only praise for Vietnam’s economic dynamism and the government’s
pro-market and pro-investment policies; now the government appears to be
crawling at least partially back into its isolationist communist era shell as
it avoids a possible platform for criticism of its new, more restrictive policy
settings. The conference organizers have said the event will be held in
September instead.
But it’s not clear that by then macroeconomic stability will have been
restored. Inflation and other pricing distortions brought on by what some
analysts refer to as Vietnam’s "overheating" economy clearly represents the
government’s and central bank’s first big technocratic test since opening
widely the economy to foreign capital inflows.
The SBV has in recent months put a brake on money supply growth, in a blunt
attempt to mop up the liquidity flowing into the financial system through
foreign direct investments and portfolio flows. The SBV has long maintained an
effectively fixed exchange rate at an artificially low rate to promote exports.
Now that rate, as of March 13 officially at 15,865 dong per US dollar, is
coming under increasing speculative pressure for an upward revaluation.
Foreign businesses in the export sector have been most adversely affected by
the SBV’s recent interventions. That includes the central bank’s efforts to
tighten the local money supply, which have made it increasingly difficult for
firms to exchange foreign currency, primarily US dollars, for the local
currency, the dong.
At the same time, the government has ordered the central bank and other
ministries to put more restrictions in place. That includes stricter rules for
lending, raising interest rates, increasing compulsory bank reserves and
expanding bond issues to absorb local currency. Credit growth through the
banking system is also through government order to be limited to 30% in 2008,
capped lower than the 40% growth seen in 2007.
The government has also tentatively allowed the exchange rate to appreciate
above its current above-under trading band of 0.75% to 2%, an official rate set
and managed by the SBV. A strong dong, policymaker hopes, will help reduce
inflation by making imports relatively cheaper, but also raises concerns that
an appreciating currency will also make exports less competitive vis-à-vis
China, which has also recently allowed its fixed exchange rate to rise only
marginally.
Hanoi’s new tighter monetary policy settings are also straining local
businesses, particularly those with significant foreign currency receipts and
which draw on foreign funds in order to make local payments. There are a
growing number of reports about foreign-invested firms encountering dong
shortages at local banks, with some as a result lacking the resources to pay
staff and rents. With banks under strict orders to preserve their dong
holdings, many businesses are now operating outside of the official banking
system for their local currency needs.
Vietnam’s nascent stock market, which has lost much of its luster over the past
12 months, is also being hit by inflation and the government's restrictive
response. For instance there has been widespread selling on the Ho Chi Minh
Exchange among the local retail investors who dominate the US$20 billion
market. In an attempt to calm investor jitters, the government’s investment arm
is reportedly purchasing more shares to shore up prices.
The bigger risk is that tighter monetary conditions afflict the banking sector,
which some argue was already wobbly before inflationary pressures entered the
financial equation. Analysts predict that cracks could appear first at the
so-called joint stock banks, as competition for deposits increasingly favors
larger state-owned banks because of their inherent (or at least hoped for)
sovereign guarantee. The US credit rating agency Standard & Poor's
(S&P) warned in a February report that "a prolonged liquidity squeeze will
exacerbate the inherent structural weakness in Vietnam’s banking system".
Meanwhile US investment bank JPMorgan Chase expects headline inflation to
average 16.1% this year, nearly double the 8.5% clip experienced in 2007.
However views about how dangerous the inflationary situation is to the
country’s overall economic health vary. S&P says it does not expect high
inflation to result in a sovereign credit rating downgrade in the next one or
two years, unless inflation accelerates much faster.
That’s cold comfort to the country’s huge poor population, which with the
rising price of basic staples is finding it increasingly difficult to make ends
meet. Jonathan Pincus, the United Nations Development Program’s (UNDP) senior
economist in Hanoi, recently told the media that the government needs to target
inflation below 10% so that businesses can confidentially map out production
and investment plans, exports remain competitive, and the poor are not
disproportionately hurt.
The economist noted that Vietnam's inflation rate is now twice as high as other
countries in the region, including China. "It is a big blow if the inflation is
above 10%," Pincus said. "Vietnam has to recognize that there are global
problems, but there are also problems that are very specific to Vietnam and
need to be solved in Vietnam." For now, the verdict is still out on whether
Vietnam’s until now untested technocrats are up to that task.
Andrew Symon is a Singapore-based journalist and analyst. He may be
reached at andrew.symon@yahoo.com.sg.
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